What amount shall be reported as provision for lawsuit

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Question - During 2020, Air Supply Company is the defendant in a patent infringement suit. The entity's lawyers believe there is a 25% chance that the court will dismiss the case and the company will incur an outflow of economic benefits.

However, if the court rules in favor of the claimant, the lawyers believe that there is a 30% chance that the company will be required to pay damages of P500,000 and a 70% chance that the entity will be required to pay damages of P200,000. Other outcomes are highly unlikely.

The court is expected to rule in late December 2021. There is no indication that the claimant will settle out of court.

A 5% risk adjustment factor to the expected cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates.

An appropriate discount rate of 6% per year. The present value of 1 at 6% for one period is 0.9434.

Required - What amount shall be reported as provision for lawsuit on December 31, 2020?

Reference no: EM133124242

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